What are the Costs Associated with a Reverse Mortgage?
Closing costs for a reverse mortgage are similar to the costs associated with a regular “forward” mortgage. These costs may be financed with the loan and include:
The origination fee covers the lender’s operating expenses associated with making the reverse mortgage. This can include things such as loan processor and underwriter salaries and operations overhead – the cost of the office space, the document preparation systems, licenses, marketing, and the like.
With a HECM, the fee is set at 2% of the first $200,000 value of the home and 1% for any amount over $200,000. There is a minimum of $2,500 and maximum of $6,000 set for this fee. In some instances, all or a portion of this fee may be given back to the borrower at closing.
An independent, third party individual will be contracted to come to your home to establish a value on the property. Their evaluation will compare similar properties with similar conditions that have sold recently, make adjustments, and provide a report with a value and the basis for this value. An appraisal typically costs $500, but may be more if the property is waterfront, is high value, or has any special features. If an appraiser notices any needed repairs, he will be required to revisit the home to determine that the repairs have been completed. Each follow-up inspection may cost $100-$150 additional.
In September of 2018, HUD (Housing and Urban Development) announced that reverse mortgage lenders would be required to provide a second appraisal on properties flagged by FHA as having potentially inflated property valuations. These second evaluations typically involve waterfront, larger homes, or specialty properties and are only required on less than 20% of the properties.
Mortgage Insurance Premium
The HECM is insured by FHA and includes an initial mortgage insurance premium and annual premium. Currently, this up-front premium is equal to 2% of the value of the home. In addition to the initial mortgage insurance premium, an annual mortgage insurance premium of .5% of the outstanding balance is charged monthly. On a HECM loan, the mortgage insurance premium ensures that the borrower will have full access to their funds should the lender go out of business. It also protects homeowners in the event that the loan balance ever exceeds the value of the property. When the borrowers permanently leave the property, they will never owe more than the value of the home.
Closing costs are similar to costs that you would pay in any mortgage loan transaction as well as a fee for the mandated reverse mortgage counseling. These fees include, but are not limited to:
Flood Zone Certification
Closing Agent Fees and Title Examination
Other Fees as Necessary
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